This discussion should be read in conjunction with our consolidated financial statements as ofJune 27, 2020 , and for the fiscal year then ended, and Management's Discussion and Analysis of Financial Condition and Results of Operations, both contained in our Annual Report on Form 10-K for the fiscal year endedJune 27, 2020 (our fiscal 2020 Form 10-K), as well as the consolidated financial statements (unaudited) and notes to the consolidated financial statements (unaudited) contained in this report. Sysco's fiscal year ends on the Saturday nearest toJune 30th . This results in a 53-week year endingJuly 3, 2021 for fiscal 2021. Highlights Our second quarter of fiscal 2021 results continue to be impacted by the COVID-19 pandemic; however, we achieved a profitable quarter despite a 23% reduction in sales and funded investments to enable our transformation. Our business transformation is on track as Sysco continues to manage the business through the COVID-19 pandemic and create new capabilities for our future. These capabilities will enable us to better serve our customers, differentiate ourselves from our competitors and deliver strong business results. Our strategic transformation priorities include acceleration of our work across our customer-facing tools and technology, sales transformation to improve selling effectiveness and provide a more customer-centric structure, regionalization of ourU.S. Broadline business to enable us to operate with greater agility and efficiency as a company, and the permanent reduction of costs from the business. All of these efforts are expected to enable us to improve profitability and fund new sources of business growth. See below for a comparison of our second quarter of fiscal 2021 results to our second quarter of fiscal 2020 results, both including and excluding Certain Items.
Comparisons of results from the second quarter of fiscal 2021 to the second quarter of fiscal 2020:
•Sales:
•decreased 23.1%, or$3.5 billion , to$11.6 billion ; •Operating income: •decreased 61.6%, or$340.4 million , to$212.1 million ; •adjusted operating income decreased 62.7%, or$392.8 million , to$234.1 million ; •Net earnings: •decreased 82.4%, or$316.1 million , to$67.3 million ; •adjusted net earnings decreased 80.4%, or$351.9 million , to$85.9 million ; •Basic earnings per share: •decreased 82.7%, or$0.62 , to$0.13 per share; •Diluted earnings per share: •decreased 82.4%, or$0.61 , to$0.13 per share; and •adjusted diluted earnings per share decreased 80.0%, or$0.68 , to$0.17 per share.
Comparisons of results from the first 26 weeks of fiscal 2021 to the first 26 weeks of fiscal 2020:
•Sales:
•decreased 23.1%, or$7.0 billion , to$23.3 billion ; •Operating income: •decreased 48.3%, or$589.2 million , to$631.6 million ; •adjusted operating income decreased 56.3%, or$770.1 million , to$598.7 million ; •Net earnings: •decreased 66.1%, or$553.0 million , to$284.2 million ; •adjusted net earnings decreased 72.6%, or$688.8 million , to$259.3 million ; •Basic earnings per share: •decreased 65.9%, or$1.08 , to$0.56 per share; •Diluted earnings per share: •decreased 65.4%, or$1.06 , to$0.56 per share; and •adjusted diluted earnings per share decreased 72.1%, or$1.32 , to$0.51 per share. Sysco's results of operations for fiscal 2021 and fiscal 2020 were impacted by restructuring and transformational project costs consisting of: (1) expenses associated with our various transformation initiatives; (2) severance and facility closure charges; and (3) restructuring charges. Sysco's results for fiscal 2021 and fiscal 2020 were also impacted by intangible 28 --------------------------------------------------------------------------------
amortization expense related to the fiscal 2017 acquisition of
Fiscal 2021 results of operations were also positively impacted by the reduction of bad debt expense previously recognized in fiscal 2020 due to the unexpected impact of the COVID-19 pandemic on the collectability of our pre-pandemic trade receivable balances. While Sysco traditionally incurs bad debt expense, the magnitude of such expenses and benefits that we have experienced since the onset of the COVID-19 pandemic is not indicative of our normal operations. Our adjusted results have not been normalized in a manner that would exclude the full impact of the COVID-19 pandemic on our business. As such, Sysco has not adjusted its results for lost sales, inventory write-offs or other costs associated with the COVID-19 pandemic not previously stated. The fiscal 2021 and fiscal 2020 items discussed above are collectively referred to as "Certain Items." The results of our foreign operations can be impacted by changes in exchange rates applicable to converting from local currencies toU.S. dollars. We measure our International Foodservice Operations results on a constant currency basis. Our discussion below of our results includes certain non-GAAP financial measures that we believe provide important perspective with respect to underlying business trends. Other than free cash flow, any non-GAAP financial measures will be denoted as adjusted measures and exclude the impact from Certain Items, and certain metrics are stated on a constant currency basis. More information on the rationale for the use of non-GAAP financial measures and reconciliations to the most directly comparable numbers calculated in accordance withU.S. generally accepted accounting principles (GAAP) can be found under "Non-GAAP Reconciliations." During the fourth quarter of fiscal 2020, Sysco revised the way performance is assessed for theU.S. Foodservice Operations segment. As a result of this change, charges incurred by the company's corporate office to provide direct support functions to theU.S. Foodservice Operations reportable segment have been reclassified from Corporate expenses into theU.S. Foodservice reportable segment. The segment information disclosed for fiscal 2021 reflects this change in reporting structure and prior year amounts have been reclassified to conform with the current year presentation.
Key Performance Indicators
Sysco seeks to meet its strategic goals by continually measuring its success in its key performance metrics that drive stakeholder value through sales growth and capital allocation and deployment. The COVID-19 pandemic has significantly impacted the financial metrics used by management to evaluate the business, and certain metrics continue to be a near- and long-term focus, while other metrics do not provide meaningful comparable information in the near-term. We believe the following are our most significant performance metrics in our current business environment:
•Adjusted operating income growth (non-GAAP);
•Adjusted diluted earnings per share growth (non-GAAP);
•Case volume growth by customer type for
We use these financial metrics and related computations, as well as sales and gross profit growth, to evaluate our business and to plan for near-and long-term operating and strategic decisions. We believe it is useful to provide investors with the same financial information that we use internally to make comparisons of our historical operating results, identify trends in our underlying operating results and evaluate our business. 29 --------------------------------------------------------------------------------
Trends Economic and Industry Trends In response to the COVID-19 pandemic, national and local governments have imposed substantial restrictions upon the customers we serve in the food-away-from-home sector. Our customers experienced increasingly restrictive conditions on their operations during the second quarter of fiscal 2021, which was most notable in December when restaurant traffic and sales declined. Additionally, the International Foodservice Operations segment has been impacted significantly due to tougher restrictions in the countries in which we operate, particularly inEurope , which went into lockdown in December and is expected to remain in varying degrees of lockdown for a significant portion of the second half of fiscal 2021. Sysco is helping our customers navigate this challenging environment, and in the second quarter of fiscal 2021, as a result of these efforts, Sysco gained overall market share versus the rest of the industry, reflecting the early progress of our transformation and our success in winning new business. Sales and Gross Profit Trends Our sales and gross profit performance can be influenced by multiple factors, including price, volume, customer mix, product mix and the impact of the COVID-19 pandemic. The biggest factor affecting performance in the first 26 weeks of fiscal 2021 was the COVID-19 pandemic due to reduced volume. In terms of customer mix, during the second quarter of fiscal 2021, we added more new local customers than we have added during any quarter in the last five years. This evidences our ability to accelerate future growth. Gross margins were also adversely impacted by lower volumes in December due to restrictions on our customers resulting from the impact of the second wave of COVID-19 in different geographies. Since the beginning of the third quarter of fiscal 2021, however, we are seeing volume improvements in our largest businesses inNorth America . With our focus on growing sales, in the second quarter of fiscal 2021, we added$200 million of net new national account business, which totals more than$1.5 billion of contracted business on an annualized basis since the beginning of the pandemic. We believe these customer additions will enable Sysco to recover faster than the market as economic conditions improve. Our gross margin decreased 67 and 53 basis points in the second quarter and first 26 weeks of fiscal 2021, respectively, compared to the respective prior year periods. For ourU.S. Foodservice Operations segment, we typically see a seasonal decline in gross margin sequentially from the first quarter to the second quarter, as we did this fiscal year. Our largest businesses,U.S. Foodservice Operations and SYGMA, each had a flat gross margin rates when compared to the same quarter of the prior year, while the International Foodservice Operations business and businesses in our other segment showed gross margin declines in the quarter. The growth of our national accounts business at SYGMA produced a customer mix shift that resulted in overall lower margins for Sysco, as gross margin on sales to our national customers is generally lower than on sales to other types of customers due to the higher volumes we sell to these customers. In terms of the impact on pricing, we experienced inflation at a rate of 1.6% and 1.3% during the second quarter and first 26 weeks of fiscal 2021, respectively, primarily in the paper and disposables, poultry and dairy products categories. Operating Expense Trends Total operating expenses decreased 17.1% and 19.0% during the second quarter and first 26 weeks of fiscal 2021, respectively, as compared to the same periods in fiscal 2020. The largest contributor to the decrease was reduced costs from cost-out initiatives (see "Cost-out Measures" below), as well as a benefit from a reduction in our allowance for doubtful accounts resulting from the COVID-19 pandemic. Many of Sysco's customers, including those in the restaurant, hospitality and education segments, are operating at a substantially reduced volume due to governmental requirements for closures or other social-distancing measures, and a portion of Sysco's customers are closed. Some of these customers have ceased paying their outstanding receivables, creating uncertainty as to their collectability. We established reserves for bad debts in fiscal 2020 for these receivables; however, collections have improved in fiscal 2021 and, as a result, we have reduced our reserves on pre-pandemic receivables, recognizing a$30.3 million and$128.9 million benefit in the second quarter and first 26 weeks of fiscal 2021, respectively, included as a Certain Item. Additional reserves of$13.8 million and$34.7 million were recorded in the second quarter and first 26 weeks of fiscal 2021, respectively, for receivables relating to periods beginning after the onset of the COVID-19 pandemic, which are not included as a Certain Item. The COVID-19 pandemic is more widespread and longer in duration than historical disasters impacting our business, and it is possible that actual uncollectible amounts will differ and additional charges may be required; however, if collections continue to improve, it is also possible that additional reductions in our bad debt reserve could occur. 30 --------------------------------------------------------------------------------
Cost-out Measures
The COVID-19 crisis has compelled us to take action to reduce costs by reducing variable expenses in response to reduced customer demand, aligning inventory to current sales trends, reducing capital expenditures to only urgent projects and targeted investments and tightly managing receivables. These actions produced savings in the second quarter and first 26 weeks of fiscal 2021. We have reduced pay-related expenses through headcount reductions across the organization, most of which occurred in fiscal 2020. OurU.S. Broadline regionalization also contributed to reduced costs, as we experienced an increase in warehouse productivity and maintained key transportation efficiency metrics despite significant changes in case volume in the second quarter of fiscal 2021. We brought back hundreds of associates in the second quarter of fiscal 2021 in support of our business model. In the latter part of the third quarter of fiscal 2021, we anticipate we will hire thousands of additional sales consultants, new business developers, culinary experts and operations associates in preparation for the incremental volume associated with the expected business recovery. Our operating expenses therefore are expected to increase in the third quarter of fiscal 2021 in contrast to the reduction in force efforts taken in the third quarter of fiscal 2020. We continue to make progress against our$350 million cost savings initiatives in fiscal 2021, and we continue to make purposeful investments in our capability builds in service of our transformation of pricing, customer experience, sales, vendor management and personalization. While we expect significant returns on these efforts in future quarters, the investment dollars are offsetting part of our savings in the second quarter and will do so in the second half of fiscal 2021. When combined with the impact of slower openings in our International segment, we expect our third quarter results to be more challenging than originally anticipated.
Status of Supply Chain Disruptions and Facility Closures
Although our business continues to face challenges associated with the COVID-19 crisis, to date we have not experienced any significant disruptions to our supply chain, significant distribution facility closures or disposals of significant assets or lines of business.
Income Tax Trends
Our provision for income taxes primarily reflects a combination of income earned and taxed in the variousU.S. federal and state, as well as foreign, jurisdictions. Tax law changes, increases or decreases in book versus tax basis differences, accruals or adjustments of accruals for unrecognized tax benefits or valuation allowances, and our change in the mix of earnings from these taxing jurisdictions all affect the overall effective tax rate. The impact of the COVID-19 pandemic may change our mix of earnings by jurisdiction and has increased the risk that operating losses may occur within certain of our jurisdictions that could lead to the recognition of valuation allowances against certain deferred tax assets in the future, if these losses are prolonged beyond our current expectations. These effects could negatively impact our income tax expense, net earnings, and balance sheet.
Divestitures
Sysco sold its interests in Davigel Spain, part of the International Foodservice Operations segment, in the third quarter of fiscal 2021 and sold its interest inCake Corporation in the first quarter of fiscal 2021. These operations were not significant to Sysco's business, and these divestitures will facilitate our efforts to prioritize our focus and investments on our core business.
Strategy
In response to the current environment, we have identified four key areas of focus as we manage the business in the near-term and prepare the company for recovery once the COVID-19 crisis subsides. First, we have taken actions to strengthen our overall liquidity. Second, we are focused on stabilizing the business by removing costs. Third, we are creating new sources of revenue by helping our restaurant customers succeed under pandemic conditions. Fourth, we are providing products for cleaning, sanitation, and personal protection, without disruptions, so that our customers may continue their business operations. While our response to the COVID-19 pandemic has been a primary focus, we have also accelerated our transformation initiatives that improve how we serve our customers, differentiate Sysco from our competitors and transform the foodservice distribution industry. These include: •Improving service to our customers by enhancing our digital order entry platform, Sysco Shop, deploying a digital pricing tool and introducing our Restaurants Rising campaign; •Transforming our sales model to make it easier for customers to do business with Sysco and to increase the effectiveness of our sales teams; •Regionalizing our operations in theU.S. within ourU.S. Broadline business; and 31 --------------------------------------------------------------------------------
•Removing structural fixed costs from our business and becoming a more efficient company to return value to shareholders and to fund our continued growth plans.
Throughout the second quarter of fiscal 2021, the number of customer orders placed through Sysco Shop, our mobile ordering platform that allows us to onboard new customers in less than 24 hours and drive incremental sales, continued to meaningfully increase. We believe this increase is a direct result of the improvements we are making to the Sysco Shop platform and the feedback we are soliciting from our customers and expert sales force. Additionally, the pilot program for our new pricing software is performing well in our first test region, and we intend to implement the pricing system across the country in calendar year 2021. The goal of this effort is to improve price transparency with our customers and drive incremental sales and gross profit growth by optimizing prices at the customer and item level. Additionally, by automating customer level pricing, we will free up time for our sales consultants to spend with customers on value-added activities, such as menu design, Sysco brand penetration, and other drivers of sales and margin. Our sales consultants are leveraging the Restaurants Rising program, which eliminates order minimums and allows our sales consultants to assist their customers in optimizing operations, to retain current customers and help Sysco attract and serve new customers. We are improving our go-to-market selling strategy by transforming our sales process to create an improved, more customer-centric organizational structure. The regionalization of ourU.S. Broadline business is complete, and the new structure has optimized our inventory assortment across multiple physical sites and optimized the servicing of key customers by ensuring the most efficient physical location services each customer location. See "Non-GAAP Reconciliations" below for an explanation of adjusted operating income and adjusted return on invested capital, which are non-GAAP financial measures. Results of Operations
The following table sets forth the components of our consolidated results of operations expressed as a percentage of sales for the periods indicated:
13-Week Period Ended 26-Week Period Ended Dec. 26, 2020 Dec. 28, 2019 Dec. 26, 2020 Dec. 28, 2019 Sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 81.8 81.2 81.5 81.0 Gross profit 18.2 18.8 18.5 19.0 Operating expenses 16.3 15.1 15.8 15.0 Operating income 1.9 3.7 2.7 4.0 Interest expense 1.3 0.5 1.3 0.5 Other (income) expense, net (0.1) - - - Earnings before income taxes 0.7 3.2 1.4 3.5 Income taxes 0.1 0.6 0.2 0.7 Net earnings 0.6 % 2.6 % 1.2 % 2.8 % 32
--------------------------------------------------------------------------------
The following table sets forth the change in the components of our consolidated results of operations expressed as a percentage increase or decrease over the comparable period in the prior year:
13-Week Period Ended 26-Week Period Ended Dec. 26, 2020 Dec. 26, 2020 Sales (23.1) % (23.1) % Cost of sales (22.4) (22.6) Gross profit (25.8) (25.2) Operating expenses (17.1) (19.0) Operating income (61.6) (48.3) Interest expense 90.8 83.1 Other (income) expense, net (1) (2) 1,827.6 (162.1) Earnings before income taxes (83.0) (67.9) Income taxes (85.1) (74.8) Net earnings (82.4) % (66.1) % Basic earnings per share (82.7) % (65.9) % Diluted earnings per share (82.4) (65.4) Average shares outstanding - (0.4) Diluted shares outstanding (0.5) (1.0) (1)Other (income) expense, net was income of$15.6 million and$0.8 million in the second quarter of fiscal 2021 and fiscal 2020, respectively. (2)Other (income) expense, net was income of$1.4 million and expense of$2.3 million in the first 26 weeks of fiscal 2021 and fiscal 2020, respectively.
The following tables represent our results by reportable segments:
© Edgar Online, source